Every construction project is unique, but there are three common elements that must always be managed effectively to deliver a project successfully: scope, cost and time. These elements are common to all engineering disciplines; for example, a power plant is very different from a residential building, but both projects must be defined (scope), scheduled (timeframe) and budgeted (cost).
The Earned Value Method
A common approach to tracking progress in construction is to compare the percentage of work completed against a project plan, but this has a limitation: there is no guarantee that the work completed actually matches the percentage of the budget paid so far. The earned value method (EVM) was developed to account for this and is a powerful construction management tool. To understand EVM, three important concepts must be defined:
- The planned value (PV) is the value of the work that is expected to be completed by a certain date, and is also known as the budgeted cost of scheduled work (BCWS). The PV provides a baseline for the project schedule, encompassing both the percentage of work completed and the cost incurred.
- Earned value (EV) is the value of work actually completed by a given date, and is also known as budgeted cost of work performed (BCWP). Since EV reflects actual progress, it is calculated once per final product. By definition, an EV projection is impossible because that would be the PV.
- Actual cost (AC) is the accumulated expense as of a given date and is also known as actual cost of work performed (ACWP).
The power of the earned value method is that it allows project scope, time, and cost to be managed simultaneously. In a project that is being completed exactly according to schedule and budget, these three values are equal. However, this is an ideal scenario that does not occur in real life, and different conclusions can be drawn by comparing PV, EV and AC.
Planned value and added value
By comparing these two values, a construction manager can conclude whether a project is on schedule, behind schedule, or ahead of schedule:
- If the earned value exceeds the planned value, the project is ahead of schedule.
- On the other hand, if the amount earned is below the planned amount; the project is delayed.
Added value and real cost
When these two values are compared, the construction manager can determine whether a project is exceeding its budget or being completed for less.
- If the added value is greater than the actual cost, the project is saving money. The work completed so far has consumed less budget than initially anticipated.
- If the actual cost is greater than the earned value, the project is exceeding its budget.
Planned value and actual cost
The comparison between these two metrics can be ambiguous and conclusions can only be drawn if VE is also considered.
- The best scenario is: Added Value > Planned Value > Actual Cost. Describes a project that is being completed faster than scheduled and at a cost below budget.
- The worst case scenario is Actual Cost > Planned Value > Added Value. This describes a project that is behind schedule and exceeding its budget.
Examples: Value-Added Method
The earned value method is much easier to visualize through progress charts. Suppose a project has a total cost of $1,000,000 and there are three interim progress reports before completion. According to the project plan, the budget will be consumed as follows:
- Milestone 01 – US$400,000 (40%)
- Milestone 02 – US$650,000 (65%)
- Milestone 03 – US$880,000 (88%)
- Milestone 04 – US$1,000,000 (100%)
If these values are represented graphically, the following result is obtained:
The first progress report is delivered and the following result is obtained:
- PV = $400,000
- EV = US$360,000
- CA = US$440,000
The project is late (EV < PV) and over budget (AC > EV). At this rate, the project will be delivered late and exceed its total budget.
Corrective actions are taken to second progress report improving performance:
- PV = $650,000
- EV = US$635,000
- CA = US$660,000
The project is still behind schedule and over budget, but the gap has been closed. Corrective actions taken between Milestones 1 and 2 were effective.
For the third progress report, the result is as follows:
- PV = $880,000
- EV = US$900,000
- CA = US$865,000
The project is now a little ahead of schedule, but has achieved savings. The final progress report shows a favorable result:
- PV = US$1,000,000
- EV = US$1,000,000
- CA = US$985,000
The project is completed on time and actual expenses are $15,000 below the total budget. Without the earned value method, the performance problem at Milestone 1 would have been more difficult to detect. The construction manager would only know that expenses are $40,000 higher than planned – this could be favorable if the project is progressing faster or unfavorable if the project is exceeding budget.
Additional Aspects of Construction Administration
Effective construction management involves completing the project scope within the planned time frame and without exceeding budget, but this is just the big picture. There are many other aspects that must be addressed and managed proactively to ensure project success:
- Human Resources
- Communication
- Project Risks
- Shopping
Human Resources
To successfully deliver a project, you need a team with the right skill set. Once the team is assembled, it must be managed appropriately so that collaboration and synergy are achieved and maintained. The Project Management Institute divides the human resources management process into four main steps:
- Planning: Before a project team is formed, it is necessary to determine the key roles and skills required.
- Acquiring the project team, which involves checking the availability of human resources and possibly hiring external staff temporarily, for the duration of the project.
- Team development: Achieve the degree of collaboration necessary to successfully execute the project.
- Team Management: Track performance, provide follow-up and feedback, and resolve issues so that team synergy is maintained throughout the project.
Communications
The projects involve personnel from different professional backgrounds and, often, from different companies. Unless communication is planned and managed, misunderstandings and confusion are likely.
Before starting a project, it is necessary to define the types of documents that will be used and their formats, the frequency of meetings and site visits, as well as the communication channels to be used. For each type of document, it is necessary to define who is responsible for generating the file and to whom it should be addressed.
Project Risks
No construction project is without risks and the construction management process must also include a framework to address them. The Project Management Institute provides the following guidelines for the risk management process:
- Risk identification
- Assessment of each risk based on its probability of occurrence and impact if it occurs. For example, a natural disaster represents a high-impact, low-probability risk, while delays in equipment deliveries have a much lower impact but higher probability.
- Determine the response to each risk if it occurs.
- Risk tracking: reevaluating the impact and likelihood of each risk throughout the construction process to take into account changes in project conditions.
Shopping
Even if a construction project is carried out exclusively by one company, third-party products and services are usually required. These products and services have lead times and involve interaction with the internal project team, which means they must be managed proactively to avoid disruptions to the flow of construction activities. Ideally, each product and service delivered by third parties should be readily available when required by project activities, or the entire construction process could be delayed.
A very important part of procurement is determining when it makes sense to outsource specific activities. There are cases where internal staff can carry out a specific activity, but it is more cost-effective to hire third parties, allowing project staff to focus on higher priority activities.
Conclusion
The results of a project can be greatly improved with effective construction management. When a reliable framework exists to track progress and coordinate all aspects of project execution, resources can be used more effectively, with the potential to reduce the total cost of the project.
